The Futures Pricing Puzzle

Abstract

This paper models commodity futures in a rational expectations equilibrium specifically (i) incorporating the conflict of interests between Hedgers (Producers-Consumers) and Speculators and (ii) superimposing constraints to immunize the real sector of the economy from shocks of excessive futures contracting. We extend the framework of Newbery and Stiglitz (1981), Anderson and Danthine (1983) and Britto (1984) to attribute the conflicting and puzzling results in the empirical literature to the presence of multiple equilibria ranked in a pecking order of decreasing pareto-efficiency. Thus, we caution empirical researchers on making inferences on data embedded with moving equilibria, as it can render their analysis of asset pricing mechanism incomprehensible. Finally, we rationalize the imposition of position limits by policy makers to help steer the equilibria to pareto-inferior ones, which make the real sector of the economy more resilient to shocks from the financial sectorContango, Expectations, Normal Backwardations